Under the coalition government led by Croatian Democratic Union (HDZ), Croatia has achieved its key objective of being given candidate status by the European Council, with negotiations for EU membership scheduled to begin in March 2005. The government of Prime Minister Ivo Sanader has made excellent progress in improving relations with neighboring countries and has improved cooperation with the International Criminal Tribunal for former Yugoslavia (ICTY) at The Hague. The Prime Minister has indicated the intention of the government to join the EU by 2008. This will depend on the country moving rapidly to adopt the acquis communautaire. While a start has been made through the Stabilisation and Association Agreement with EU, much remains to be done. To address the outstanding issues, the pre-Accession economic programme for 2005 - 2007 will focus on improving the business climate and support to SMEs, restructuring of public enterprises, acceleration of privatisation, removal of administrative barriers, and achievement of fiscal discipline.
The strong GDP growth over the past two years, with rate of growth of 5.2 per cent in 2002 and 4.3 per cent in 2003, and estimated 3.7 per cent in 2004, was supported by industrial restructuring, by government initiated projects in the road and construction sectors, and by strong private consumption underpinned by growth in lending by the commercial banks. The IMF board approved a new EUR 110 million Stand by Agreement in August 2004, which the authorities intend to treat as precautionary. The programme is intended to help the government with fiscal consolidation and the implementation of structural reforms during the first stage of negotiations for EU membership. The fiscal consolidation process agreed with the IMF should help the government in strengthening fiscal discipline and reducing the external debt. Structural reforms have been resumed and the authorities have the ambitious target of completing small scale privatisation by 2005.
Important structural challenges are needed
In the coming two years, the Republic of Croatia faces important structural challenges. These include restructuring and privatisation of the remaining state-owned utilities and small enterprises in the tourism sector, and acceleration of reforms in the public administration and the judiciary. To address such challenges, the Croatian authorities should:
1. promote private sector participation in infrastructure both at national and the local municipal levels, whereas at the same time strengthening the independence and capacity of the newly established regulatory authorities;
2. improve the business environment through the simplification of licensing and other legislative requirement in order to attract green-field investments and FDI flows;
3. accelerate the privatisation process of public utilities and small enterprises in the tourism sector, a crucial sector of the economy;
4. initiate restructuring in sensitive sectors, e.g., agriculture and shipbuilding
5. strengthen efforts to enhance transparency and efficiency of, and to reduce corruption in the judiciary and public administration to meet EU standards;
6. further develop regional cooperation with neighbouring countries in Central and South-East Europe through the enhancement of cross-border trade flows, investment and FDI, promotion of outward trade and investment, and promotion of regional initiatives supported by policy dialogue
Croatia contributes to regional growth and stability
Since the last Country Strategy, the Bank's commitments in Croatia have significantly increased to an aggregate of EUR 1.3 billion, with about EUR 3 billion mobilized from cofinanciers. Croatia is an important partner for the Bank, providing a significant contribution to regional economic growth and stability. Each year since 1999 the Bank has invested an average of EUR 150 million a year in Croatia. The Bank's net business volume as of end December 2004 was EUR 917 million with operating assets of EUR 591.4 million. In line with the previous strategy (2002-2004) the Bank has substantially increased its involvement in infrastructure, including at the municipal level and enterprise sectors. The Bank's operations have had good transition impact through continuous policy dialogue with the authorities, improvement in corporate governance standards at enterprise level, enhancement of regional integration, and introduction of private sector concepts in infrastructure financing. In 2004 the Bank supported regional economic integration by financing the expansion into Serbia of the largest dairy products company in Croatia.
Focus will be on infrastructure, SME and tourism
Over the coming two to three years, the Bank has an opportunity to work closely with the Croatian authorities, to support the country's preparation for EU Accession. Focus will be on investment in the following sectors, with highest priority given to infrastructure, SME finance, and tourism:
In the infrastructure and environment sector, the Bank will work with a number of large and medium-sized municipalities to develop their infrastructure projects for prospective ISPA co-financing. In addition, the Bank will continue to roll out instruments to reach small municipalities through local banks, promoting investment in environmental infrastructure with donor support (EU and Netherlands). The Bank will continue to support national infrastructure projects in the transport sector in particular. All infrastructure projects to be pursued will need to take account of limited centralized budget resources and sovereign borrowing capacity and therefore use private sector financing structures where feasible. Infrastructure sector financing will be closely co-ordinated with the Croatian authorities and other IFIs, in particular the European Investment Bank and the EU, leading to joint financing arrangements and mobilisation of ISPA funds, where practicable.
In the financial sector, the Bank will pursue SME and micro finance, inter alia with the support of Phare under the EU/EBRD SME Finance Facility and Rural Finance Facility. While growth in financial intermediation in Croatia has outpaced many other countries of Central Europe, this expansion in credit has been focused on households – mortgages and consumer credit. SMEs and in particular micro enterprises in rural areas lack access to finance. SME finance – with specific attention to the tourism sector - will be pursued both through banks and leasing companies. The Bank will seek to introduce securitisation of mortgage loans, which would help Croatian banks better manage their balance sheets. Finally the Bank will also consider equity participation in the privatisation of the state-owned insurance company.
With respect to privatisation and the enterprise sector, the Bank's activities are likely to focus on supporting further privatisation of strategic enterprises and restructuring of sensitive industries. The Bank will focus on financing and restructuring of hotels and related enterprises underpinning further development of tourism, a key sector of the economy. The Bank will also aim to increase its activities by supporting regional expansion and further consolidation of leading Croatian corporates and direct foreign investment into the country.
To view the entire strategy, please visit www.ebrd.org